Microsoft (Nasdaq: MSFT), the tech giant known for its Windows operating system, Office suite, and Azure cloud platform, has been a dominant force in the software industry for decades.
Looking at its stock chart, we can see Microsoft shares have been on a strong upward trajectory over the past two years, roughly doubling in value. Despite some volatility, including a sharp pullback in late 2022 and a more recent dip in mid-2023, the stock has consistently found support and climbed to new highs.
This impressive performance has left many investors wondering whether there’s still value to be found at current levels. Let’s run the stock through The Value Meter to find out.
First, let’s look at Microsoft’s enterprise value-to-net asset value (EV/NAV) ratio, which tells us how much investors are willing to pay for the company’s assets. Microsoft’s EV/NAV sits at 11.74, slightly above the average of 10.95 for companies with positive net assets.
This suggests the market is placing a modest premium on Microsoft’s assets compared with its peers’. But valuation isn’t just about asset prices. We also need to consider Microsoft’s ability to generate cash.
Over the past four quarters, the company’s free cash flow averaged 7.78% of its net assets. That’s extremely close to the 7.88% average among firms with similarly consistent cash flow generation.
So what does this mean for investors? On one hand, Microsoft’s slightly elevated EV/NAV ratio might raise some eyebrows. However, its robust and steady cash flow generation goes a long way toward justifying that premium.
We should also consider Microsoft’s positioning in the booming AI market. The company’s early moves in AI – from its partnership with OpenAI to the integration of AI features across its product line – could drive significant growth in the coming years. This potential upside isn’t fully captured by backward-looking financial metrics.
That said, Microsoft isn’t exactly flying under the radar. The stock’s strong performance in recent years suggests that much of this potential is already baked into the share price.
Microsoft’s latest quarterly results underscore its continued momentum. For the fourth quarter of its 2024 fiscal year (which ended on June 30), the company reported that its revenue increased 15% year over year to $64.7 billion, mostly due to strong growth across its cloud and AI initiatives.
Revenue from Azure and other cloud services surged 29%, while the Intelligent Cloud segment overall grew 19%. Clearly, the company’s AI investments are already paying off.
Meanwhile, Microsoft’s traditional strengths remained solid, with Office Commercial revenue increasing 12%. Perhaps most impressively, operating income jumped 15% to $27.9 billion, demonstrating the company’s ability to grow profits alongside revenue and to continue executing across its diverse portfolio while pushing into new, high-growth areas like AI.
Microsoft’s strong market position, consistent cash generation, and vast AI potential justify its current valuation. However, the lack of a clear discount relative to its peers means it’s not a screaming bargain either.
The Value Meter rates Microsoft as “Appropriately Valued.”
What stock would you like me to run through The Value Meter next? Post the ticker symbol(s) in the comments section below.
The post Is Microsoft Still a “Buy” Near Its All-Time High? appeared first on Wealthy Retirement.